Recovery and Relapse, 1976-82

President López Portillo was inaugurated on December 1, 1976, amid a
political and economic crisis inherited from the previous
administration. A rising foreign debt and inflation rate, a 55 percent
currency devaluation, and a general climate of economic uncertainty that
had spurred capital flight plagued the economy. The new administration
also faced a general lack of confidence in government institutions.
Unexpected help arrived as a result of the confirmation of the large oil
reserves. The Mexican government chose to follow a policy of increasing
oil production only gradually to prevent an inflationary spiral that
would disrupt economic recovery. Nevertheless, by 1981 Mexico had become
the fourth largest producer of oil in the world, its production having
tripled between 1976 and 1982. While production increased, so did the
price per barrel of crude oil.

The immense revenues generated by oil exports during the
administration of López Portillo gave Mexico a greater degree of
confidence in international affairs, particularly in its ever important
relations with the United States. The government, for example, refused
to participate in the United States-led boycott of the 1980 Summer
Olympic Games in Moscow. When the two countries could not agree on the
price of natural gas, Mexico flared its excess resources rather than
sell to the United States below its asking price. Also in defiance of
United States wishes, Mexico recognized the Farabundo Martí National
Liberation Front rebels in El Salvador as a representative political
force. These steps occurred although the United States remained Mexico's
major oil customer and its major source of investment capital (see
Petroleum, ch. 3; Foreign Relations, ch. 4).

As in so many developing countries, oil did not solve all of Mexico's
problems, however. The oil industry grew rapidly but could not employ
the ever-increasing ranks of the unskilled. Oil made Mexico a rich
nation in which a majority of the people continued to live in poverty.
Foreign banks and the international lending agencies, seeing Mexico as a
secure investment with abundant energy resources, flooded the country
with loans that kept the peso overvalued.

"The Crisis", 1982

Although its effects rippled through every aspect of national life,
the roots of what came to be known simply as "the crisis" were
exclusively economic. The roots of the crisis lay in the oil boom of the
late 1970s. Oil prices rose sharply at a time when oil exploration in
Mexico was at a peak. The nation found itself awash in petrodollars. Its
infrastructure, barely adequate before the boom, was overwhelmed by the
influx of imported goods that followed Mexico's rising foreign exchange
reserves and the overvalued peso. López Portillo promised "to
transform nonrenewable resources into renewable wealth." In other
words, he vowed to invest substantial amounts of the new oil revenue in
areas and projects that would establish sustainable economic growth.
This promise went unfulfilled.

Government spending did increase substantially following the oil
boom. Little, if any, of the new spending, however, qualified as
productive investment. Food subsidies, long a political necessity in
Mexico, accounted for the largest single portion of the new spending.
Although impossible to quantify, many accounts agree that the level of
graft and corruption skyrocketed. The new money fueled a level of
inflation never before seen in modern Mexico; the inflation rate
eventually surpassed 100 percent annually. The López Portillo
administration chose to ignore warning signs of inflation and opted
instead to increase spending.

The macroeconomic trends that preceded the crisis also displayed
warning signs that went unheeded. Oil income rose from 1979 to 1980. Oil
exports began to crowd out other exports; the petroleum sector accounted
for 45 percent of total exports in 1979, but dominated exports with 65.4
percent of the total in the second quarter of 1980. Like so many other
developing nations, Mexico became a single-commodity exporter. With
almost 50 billion barrels in proven reserves serving as collateral,
Mexico also became a major international borrower. Significant foreign
borrowing began under President Echeverría, but it soared under López
Portillo. Foreign banks proved just as shortsighted as the Mexican
government, approving large loans in the belief that oil revenue
expansion would continue over the terms of the loans, assuring
repayment. Hydrocarbon earnings for the period from 1977 to 1982, US$48
billion, were almost matched by public-sector external borrowing over
the same period, which totaled US$40 billion. By 1982 almost 45 percent
of export earnings went to service the country's external debt.

Living standards had already begun to decline when the oil glut hit
in 1981. Although the economy grew by an average of 6 percent per year
from 1977 to 1979, purchasing power over that period dropped by 6.5
percent. By mid-1981, overproduction had softened the international oil
market considerably. In July the government announced that it needed to
borrow US$1.2 billion to compensate for lost oil revenue. The month
before, Pemex had reduced its sales price for crude oil on the
international market by US$4 per barrel. Continued high import levels
and the drop in oil exports had boosted Mexico's current account deficit
to US$10 billion. This uncertain situation--high external debt, stagnant
exports, and a devalued currency as of February 1982--prompted investors
to pull their money out of Mexico and seek safer havens abroad. This
action, in turn, led López Portillo to nationalize the banks in
September 1982 in an effort to staunch wounds that were largely of his
own making.

López Portillo left office in 1982 a discredited figure, in no small
part because the press publicized accounts of his luxurious lifestyle.
The Mexican public, long-suffering and pragmatic in political matters,
found López Portillo's calls for "sacrifice" and austerity
unacceptable when contrasted with his own lifestyle.